AEB 3103 Principles of Food and Resource Economics

Module 9: Consumer theory and decision making

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Why does watermelon chunk sells much more expensive than an entire watermelon?

If you only have $50 to buy food for the next 14 days, what do you buy and eat?

https://www.youtube.com/watch?v=uGAiihQZxpI&ab_channel=Refinery29

Decision rule

Humans make decisions depend on comparing costs with benefits: if benefits > cost, do it. Otherwise, don’t do it.

But what are the “costs” of choosing something?

Recall opportunity cost: Because resources are scarce, the true cost of anything is what you must give up to get it.

Explicit vs. implicit cost

Accounting vs. Economic profits

Phil and Claire Dunphy (USA)

In The Price of Motherhood, Ann Crittenden claims the total cost for a college-educated couple to have a child is $1 million. She discusses the following items as costs of an educated woman having a child. Are these costs explicit, implicit, or neither?

How about a Columbian mother who drop out of high school and work as manual labor?

https://www.gapminder.org/dollar-street/families/arrieta-diaz?countries=co

How about a Kenyan mother who drop out of third grade and work as a subsistence farmer?

https://www.gapminder.org/dollar-street/families/baya?countries=ke

Fertility rate in

The implicit cost of capital

The inflation reduction act will invest $370 billion in the next 10 years.

“HOW much” vs. “Either-or” Decisions

There are two different types of decisions: * A choice between two alternatives (“either–or”) * A more complex choice that requires us to choose at the margin (“how much”) - “Should I go to college? - Should I take an extra year in school?”

Principle of “either–or” decision making

The marginal cost curve shows how the cost of producing one more unit depends on the quantity that has already been produced. * Each product has a unique marginal cost. Some basic shapes: Increasing marginal cost: Each additional unit costs more to produce than the previous one (for example, because of paying costly overtime wages). * Constant marginal cost: Each additional unit costs the same to produce as the previous one (in plant nurseries, for example, the cost of growing one more plant is the same regardless of how many plants have been produced). * Decreasing marginal cost: Each additional unit costs less to produce than the previous one (often due to learning effects in production when workers gain skills and experience).

Total Cost versus Marginal Cost

It can be easy to conclude that marginal cost and total cost must always move in the same direction.

But if the marginal cost of producing the first widget is $5, the second $4, and the third $3, total cost rises as marginal cost falls.

Marginal Benefit